Morning Commentary: “Mutiny on the Bounty”

Foreign Exchange - Morning Commentary

“Mutiny on the Bounty”

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
The British pound has been on a roller coaster ride the past 48 hours. Yesterday, it appeared that a Brexit deal was in hand but it was not 100% clear that PM May's cabinet was on board. Nevertheless, the British pound (GBP) soared briefly before fading once again. Today has seen a number of members of PM May's cabinet resign over the Brexit deal  and brings back the possibility of lack of support within the Tory party for the agreement and or no support in Parliament potentially yielding a hard Brexit or even a no-Brexit outcome.
 
The market has reacted strongly, sending U.K. interest rates sharply lower and sending the GBP down by near 1.55%, coupled with a weak U.K. retail sales figure. A volatile period of political turmoil lies ahead regarding the standing of the Brexit negotiation with an increasing possibility that PM May could face a no-confidence vote.
 
While headlines will focus on the Brexit chess pieces, the EU is unlikely to go to square one with a new Tory government or even a Labor government complicating matters more. If no Brexit deal can be struck by the deadline early next year, the U.K. would be ejected from the EU with no transition period making things even more disruptive. Continue to expect the GBP to remain volatile as headlines will cause rapid changes in sentiment.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • U.S. Retail sales for October came in well above expectations at 0.8% and is the sharpest increase in the past five months. Ex-autos also came in above expectations at 0.7%. 70% of U.S. GDP is based on consumer spending so this is another positive sign about the U.S. economy.  However, U.S. interest rates are lower on the session reacting to weaker equity performance in Europe and at the NY opening. U.S. interest rates are down four days in a row.
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